Inside the death of a fine dine

The creditor’s report indicates Justin and Georgia North increased their salaries by a combined annual $170,000 one month before they placed the group into voluntary administration and had lent themselves $230,000 in directors’ loans. Photo: Marco Del Grande

Zoë Fielding and Jemima Whyte

When Justin and Georgia North’s Sydney-based restaurant empire collapsed it left enough rubble from which their enemies could build a sizeable case against them. The collateral damage was spread widely from the North Group businesses, which included two-hatted Bécasse, Quarter 21 and Etch, as well as burger outlet Charlie & Co and The Bakery.

More than 200 trade creditors and 180 staff were left short of millions of dollars. Add the landlords, banks and the Tax Office, and collectively the group businesses owed $4.3 million.

Many employees are finding that superannuation liabilities date back to 2005. They should be able to recover annual leave entitlements and redundancy pay, but super isn’t covered by the federal government’s safety net. Moreover, the creditor’s report finds the group was likely trading insolvent from at least September 2011.

The report indicates the Norths increased their salaries by a combined annual $170,000 one month before they placed the group into voluntary administration and had lent themselves $230,000 in directors’ loans – although Justin North disputes those findings.

In any other industry, the pair would be shunned. There would be calls for a prosecution by the Australian Securities and Investments Commission.

But this is the restaurant industry, where margins are thin and the business bumps hard against the economic cycles.

Plenty of other top chef/owners have crashed only to be resurrected anew. Think of Neil Perry and Tony Bilson in Sydney and Gordon Ramsay in the UK. So bankruptcy is no sin in foodie land. The Norths got sympathy from fellow restaurateurs, critics and suppliers.

New Zealand-born North has been a darling in food circles since he opened his first Bécasse in Albion Street, Surry Hills, in 2001.

It wasn’t until 2010 – the year he appeared on the second series of Network Ten’s MasterChef, with a Sydney Morning Herald restaurant of the year and two hats already under his belt, that he reached celebrity chef status.

But success cannot be taken for granted. When the Norths went on an expansion drive later in the decade the weaknesses in their business model were to become cruelly apparent.

Creditors to the North Group voted on Friday to wind up the businesses. With little cash available for liquidators Ferrier Hodgson to work with, it’s unlikely they will take action against the Norths but this might not be the case with the bank.

Bécasse Bakery and Charlie & Co will keep trading, with the businesses having been sold late on Thursday to Jones the Grocer for $430,000 – a consideration that covered the fixtures and fittings needed to keep on trading more than any goodwill left in the brands.

All that remains of the business now is some equipment and stock, which the liquidators are selling to recoup a few dollars more.

For the Norths, 2010 was the high water mark. It was the year of a deal with Westfield to move Bécasse and open a string of other ventures in its $1.2 billion mall in the Sydney CBD.

It was a coup for Westfield, which had also recruited Michael Moore and James Susman and was using the names to reel in other restaurateurs to share the vision of fine dining at the mall.

It was also the year the North Group began spiralling out of control.

When Bécasse and Quarter 21 opened their doors in the shopping centre in 2011, there was already scepticism about the expansion. In an interview with the SMH at the time, North brushed them off. “It’s important we look after regulars but at the same time, you can’t go backwards, you have to keep moving forward,” he said.

“Some people get stuck in a little box and that’s what they think. At the end of the day, it’s pretty spectacular what we’ve done in the middle of the city and my thought of a shopping mall is nothing like this.”

Sales grew for Bécasse over the next two years. The restaurant turned over $1.7 million in the 2009 financial year. By 2011, revenue had grown to $4.6 million and in the six months to December, the restaurant brought in $3.9 million.

That dealt with the criticism that people weren’t willing to eat in shopping centres. But it failed to predict – as many did – the severe retail slump that would follow and curb shopper, and diner, appetites for spending at the high end.

Speaking to the Weekend Financial Review on Friday, North has regrets, but is philosophical. “You base your decisions on the information you’ve got at that moment,” he says.

Much of the sales growth was fuelled by massive expansion – by 2011 the Bécasse group encompassed not only Bécasse, now housed at Westfield Sydney, but also the Quarter 21 restaurant and providore and Le Grand Café for the Alliance Francaise.

North Food Catering had opened Charlie & Co in October 2010 and Bécasse Bakery in April 2011.

What few knew was that the highly acclaimed Bécasse restaurant had been losing money since 2009. The creditors’ report suggests it may have been insolvent from as far back.

North knew things weren’t always rosy but that’s the nature of running a restaurant. “You have good weeks and you have bad weeks,” he says. “One year you make a loss and the next you make a profit.”

While turnover was booming, costs were growing – and so were the losses. Bécasse lost $76,383 in 2009 – on $1.7 million in sales. By 2011, losses had blown out to $318,646 on sales of $4.6 million.

The Norths’ lower-end operations were doing a bit better. North Food Catering, the vehicle for two Charlie & Co outlets and the Bécasse Bakery, turned a $214,310 profit for the first six months of 2011 on $2.7 million sales – although the creditors’ report warns these numbers may understate expenses – recovering from its 2011 loss of $104,262 loss on sales of $2.285 million.

North’s reasoning, he says, in expanding so dramatically on the move into Westfield was to capitalise on passing trade that was lacking in the Clarence Street location, and to increase the emphasis on those lower price point businesses.

“It’s pretty clear in everyone’s mind now that running a fine dining restaurant is a hard thing to make money from,” he says. “The idea was diversifying our business model through the different markets from having hamburgers and bakery in one sector, having casual dining and then having the fine dining. The theory of that is that if one sector isn’t doing very well the others can help it through the difficult times.”

And with the downturn in the economy, the difficult times have been even more difficult than usual. A long list of fine dining establishments has hit the wall. They include, to name just a few, Manly Pavilion, Milsons at Kirribilli and Bird Cow Fish at Surry Hills.

For Bécasse, times had been tough for some time. From 2009 on, the group’s debts to trade – mainly suppliers – ballooned. When administrators were appointed, more than half the businesses’ debts were more than 60 days in arrears. Bécasse owed unsecured creditors $1.15 million and North Food Catering owed $1.23 million. Etch was more than $407,000 in debt.

That was on top of $1.33 million the three groups owed to National Australia Bank, and a $170,000 charge that Mulpha, Etch’s landlord at the Intercontinental Hotel in Sydney, had over the company’s property.

During the same period, loans from Bécasse to directors swelled from $63,718 to $206,174, according to the accounts.

When the administrators froze the seven Bécasse bank accounts and one term deposit in June, there was just $6455 in the accounts and a further $4811 cash on hand at the premises. North Food Group had $11,655 in floats at the eateries plus four bank accounts, all of which were empty.

Cost controls across the businesses were poor. The different entities co-mingled their stock and traded back and forth with scant records kept of the transactions. The creditors couldn’t even identify how much the business had paid on electricity and gas bills.

As well as poor business management, the Norths apparently failed to react to the changed economic environment. Employee expenses were by far the most significant for the business, equating to between 55 per cent and 60 per cent of sales.

Restaurant and Catering Association chief executive John Hart says that in any given year about 20 per cent of restaurants and cafes will close, largely because of unsustainable wage costs.

It’s common in the industry for wage costs to eat up as much half of a business’s turnover, Hart says, adding that even the most successful restaurants haven’t managed to overcome high wage costs, relying instead on turnover to keep themselves running.

In top restaurants, expectations of high-quality fit-outs and luxurious surroundings eat up even more of the business income.

Many respond to falling demand by reducing their head counts.

At Etch, up to 65 per cent of the takings were paid out in wages. The figures are staggeringly high even for fine dining, which suggests the group failed to cut staff in line with lower demand.

Many of the doubters were also overestimating the help Westfield was giving the business behind the scenes. After all, the shopping mall landlord was as keen as the Norths that this venture paid off: its fine dining precinct was the first of its kind in the country, and Westfield wanted it to work.

Westfield helped out with the estimated $4 million fit-out costs of the restaurant complex, which included 24-seat Bécasse, 60-seat Quarter 21, the Cookery School and providore, as well as burger outlet Charlie & Co and The Bakery.

It’s fairly common for shopping centres to offer so-called “incentives” such as assistance with shop fit-outs to desirable incoming tenants to secure the right mix of tenants in their precincts.

Indeed, the value of incentives across the retail property industry has been rising, while rents have stayed more stable, and coveted tenants have been able to secure more from the landlords.

In an incentive, the landlord would keep some value of the fit-out (based on a sliding scale) if the business was sold within a given time frame, often about three years. That’s borne out by Westfield’s having claimed just $581,289.79 of a potential $6.4 million claim in the first creditors’ meeting, with the difference explained as future charges, de-fit costs, and unexpired fit-out contributions.

Interestingly, that partnership approach has endured throughout. Westfield paid Ferriers $15,000 for seven meetings between May 24 and June 6 to advise the North Group about restructuring options seven times, and is underwriting the administrator’s bill up to $225,000 even though it is an unsecured creditor.

NAB is the only secured creditor, and first in line to receive any proceeds from asset sales – although it looks set to be left with a gaping hole worth about $900,000 in its pocket.

North says he and Georgia put in “everything they had” into the business. The creditors’ report backs that up: when discussing the prospect for pursuing assets, it reveals the Norths’ only assets are a jointly-owned property at Cremorne, subject to a NAB mortgage, and a motor vehicle owned by Justin North.

What’s unclear is where the money all went.

The business was surviving for a number of years off its suppliers’ credit. The creditors’ report shows that 52.6 per cent of its debts were more than 60 days overdue.

In other industries, one of the creditors – who were owed tens of thousands of dollars each – would have taken action against the business. But no one called Bécasse’s bluff.

The Norths kept up their mortgage repayments to the bank, so no eyebrows were raised there.

Staff kept getting their weekly wages, although annual leave was building up on the books and payments into superannuation funds were made only intermittently.

Superannuation must be paid into employees’ accounts every quarter and super funds will take action to recover the debts but Hostplus, which had most of the staff’s super, didn’t know how much the staff should have been getting.

North says staff payments were handled through an external company and has questions about some of the numbers and details in the creditors’ report.

The most bitter irony for Justin and Georgia North is that the very people they were trying to help in building their restaurant empire are the ones their failure has hurt the most. Local produce and local suppliers were important to the Norths.

“It may not seem like it now with the creditors, but our whole philosophy with the creditors has been to support and give as much exposure as we can and create a sustainable model,” North says.

“The most devastating thing about all this is when the philosophy of your whole life has been to help and support these people but you’re left owing them money.

“It’s an absolutely horrible situation to be in and we want to do whatever we can do to make this right.”

The forgiving nature of the restaurant industry should mean the Norths’ efforts to make good again will be welcomed.